The Family Home, and New Zealand's Housing Crisis

Posted by Andrew Courtney37sc on August 22, 2017

There is growing awareness of the need to tax assets in New Zealand, but this morning the Labour leader ruled out any tax on the family home. Taxing the family home may be politically unpopular, but exempting it will kneecap any serious attempt to reduce inequality and improve the allocation of investment in our country. Labour want to get experts to review our tax system, but this has already been done in 2001 and 2010, and those experts stated that it was a ‘no brainer’ to include the family home. This blog explains why TOP’s tax reform includes the family home, and why we should not make an exception.

One thing to make clear is that we do not have an issue with people owning their own home, quite the opposite in fact. We just want to make sure that all New Zealanders have a realistic chance of having secure, healthy housing. This is something that the current system is making incredibly unlikely for everyday Kiwis.

Here are three reasons why we shouldn’t exempt the family home. We will finish by looking at, if we did want to create an exemption, what the fairest way to do so would be.

1. It is the biggest tax break, and is the root cause of rising house prices

Currently the centre of the unfairness in our tax system is owner-occupied property, due to a loophole in our income tax regime. To exempt it would, in effect, not deal with the issue. As it stands this loophole is worth around $11 billion dollars per year in forgone tax revenue. The vast majority of this loophole - some 60% - is from people owning their own homes. Exempt that and you are only dealing with less than half of the problem.

Here is why. If you are saving to buy a house or simply have money in the bank you get paid interest, on which you pay tax. You are then free to spend your net interest income on renting a house, buying smashed avocado breakfasts or holidaying in Bali. But remember you have paid income tax on the money you’ve saved and also tax on the interest those savings generate.

If however you have enough savings to buy a house, you avoid that second tax. The savings you now have invested in property return you at least two material benefits: firstly, a house to live in but being both the landlord and the tenant you don’t recognise the underlying or imputed rent for the house; and secondly the untaxed capital gains. Because no money changes hands, no tax is paid. This is a large loophole that is distorting how we invest our savings.

Because everyone is chasing this tax efficient investment, it’s little surprise that housing is the most favoured place to invest our savings and it’s also no surprise that property values keep rising.

Even if we taxed the capital gains in property it wouldn’t make much difference. Recently capital gains have been as high as 25% per annum in some parts of the country. Think about that for a second. If you owned a $500,000 house in 2016, and sold that house in 2017, without giving it a single lick of paint you would have made around $125,000, and in most cases you would not pay a single cent in tax on the way through. Yes that is an extreme example, but even the average New Zealand house rose in value $48,142. That’s almost exactly the same as the median wage. Sure, speculators and property investors are among those who are taking advantage of these prices, but it’s only rational, they are simply doing what the system encourages. TOP’s tax policy will remove the tax advantage of property ownership, but the reality is that 60% of the houses in the country are owner occupied, and if we exempt them, we will in effect, not deal with the issue.

Those who are lucky enough to have a foot on the housing ladder are able to reap all these benefits. The rest of us – about 50% of Kiwis – are forced to pay rising rents that are steadily outstripping wages, and we have little prospect of ever owning a home. Yes, people have traditionally worked and saved hard to buy their own a house, but for a growing number of people hard work and frugal living is no longer sufficient to get them on the property ladder. TOP’s tax reform is all about giving your kids and younger generations the same opportunity you had.

2. Exempting the family home means the tax loophole remains

Some family homes in New Zealand are worth $50m. Do you think those houses should be exempt too? Exempting the family home will only incentivise wealthy people to invest more in their family home. That means they will buy the place next door and extend on to their section. Expect more McMansions as a result of that policy. Instead of 5 houses worth $1 million, you will just get one worth $5 million.

If you are going to dole out tax breaks, exempting the family home is a very poor way of doing it. Far better to tax everyone, and spread the gains fairly through reduced income taxes. Then most people (80%) in fact, will be better off. This is TOP policy.

3. Exemptions are the enemy of any tax system

One of the major benefits of TOP’s tax reform is that it’s comprehensive. All assets will be required to generate a minimum rate of return, or be taxed on the assumption they do. A business is not actually a business unless it generates a taxable profit at least equivalent to what can be earned in the bank. It is more likely to be a tax shelter for the proprietor’s personal expenses.

Making the tax comprehensive with no exceptions means we fully close this loophole. Having exceptions, such as not taxing the family home, will only make manipulations possible. And believe us, wealthy people can afford to hire accountants to make sure they exploit any loopholes better than anyone else can. After all, what actually defines the family home; does my bach count? What about the family farm? Or the family business that operates out of the family home? Is it only one house per person, or per family? In that case can I gift one house to my brother, and one house to my sister, one to each of my grandchildren?

There are all sorts of ways to skirt the system, and when such large sums of money are involved, you can guarantee that people will.

The fairest way to create a tax break

No doubt when TOP gets into negotiations about how to implement this policy there will be pressure from Establishment Parties to exempt the family home, as Labour have shown today. For all the reasons above, exempting the family home would be a dumb idea.

Instead, if there was a desire for exemptions, The Opportunities Party would prefer to set a threshold per person. How much tax free equity do you want each person to have? Before you answer remember that 40% of Kiwis own nothing. Okay so how much should the great Kiwi tax break be?

$100,000? $11b just became $7b.

$200,000? $11b just became $4b.

$500,000? You get the picture.

Such a system is still avoidable, people will start gifting money to their relatives that are under the tax free threshold. It sets a better precedent than an unlimited exemption on the family home but it protects tax dodging – that is both unfair and a drag on economic efficiency, productivity, income and jobs. Why would you do it, except to favour your political mates?

Do we really want a fairer society?

The whole premise of this policy is to create a fairer society. One third of the wealthiest New Zealanders are not in the top tax bracket, not because they are breaking the law, but because of the legal tax breaks provided by our system. What this means is that workers often pay a higher rate of tax than those with significant property investments. The family home may be held sacred in New Zealand, but this is just stupidy en masse.

The current system is not working; it’s making an already unequal society more starkly divided. You may get incensed at what you see as an attack on your home, but such a reaction is founded on a lack of knowledge. Remember, most New Zealanders (80%) will actually be better off under TOP’s tax regime. It’s the wealthy who will pay more, and even then, these people will benefit from a fairer, more vibrant economy. It’s no longer enough to just fiddle round the edges. We need to make drastic changes to our tax policy, and the sooner we make them, the better. Not just for you and me, but for our kids, who will always wonder how it was possible that Aunty Jane could own 14 houses, when they can barely afford to pay the rent.